Gold Prices: Have We Reached "Peak Gold"?

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Expectations for gold prices just grew brighter due to a recent outlook on production numbers.

Gold producer Iamgold Corp. (NYSE: IMG), which has mines in Canada and Mali, forecasts gold prices will soar to a record $2,500 an ounce as global output peaks and ore grades decline.

Grade is the relationship between quality, tons, geometry and depth that indicates if a gold find can be extracted at a cost that makes doing so profitable. High grade is key in a gold deposit.

Iamgold CEO Steve Letwin told Bloomberg News in a Jan. 10 interview that the industry has exploited its best-quality gold reserves and as a result is tapping lower-grade and higher-cost deposits.

In fact, he sees this as a sign of "peak gold" – when the maximum rate of global gold extraction is reached.

"I really think we are at Peak Gold. Nobody has seen the kind of production profiles they thought they were going to see," Letwin explained.

What is Peak Gold?

After peak gold is reached, there's a terminal decline in the rate of production.

The "peak gold" theory mirrors the "peak oil" theory, which maintains the earth holds a finite amount of crude, and production will eventually outstrip supply.

The peak gold phenomenon was actually spotted several years back.

Barrick Gold (NYSE: ABX) CEO Aaron Regent told The Daily Telegraph in 2009 at the Royal Bank of Canada's annual gold conference "there is a strong case to be made that we are already at peak gold."

"Production peaked around 2000 and it has been a decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," Regent said.

In 2001, the world saw what was believed to be record global gold production of 2,649 tons.

And what has happened since then in gold production supports the peak gold theory…

Production fell steadily in the following years despite rising gold prices. For the first nine months of 2012, global gold production dipped 1% from the same period a year earlier to 61.5 million ounces, according to Bloomberg.

And from 2001 to 2011, the average ore grade of reserves at 12 large producers slumped 51% to 0.028 ounce per ton.

As a result, gold miners are in the throes of a thorny predicament.

With ore quality declining, and mine development costs rising, gold production costs are outstripping profitability.

"One of two things has to happen" for gold miners, Letwin says. "Either we stop as an industry pursuing it (gold) because the costs keep rising at a faster rate than the price, or the price of gold has to go up to reflect the cost inflation."

And the largest gold miners "need to replace production, and as much as they find it vulgar, they are going to have to go to lower grade," Letwin continued.

In efforts to find higher-quality and easily accessible gold deposits, miners have taken to searching for gold in some isolated, dangerous and politically shaky regions.

Those factors have weighed on the gold mining sector as reflected in the popular Market Vectors Gold Miners ETF (NYSE: GDX). Shares of the exchange-traded fund have traded lower since the start of the year, following a 9.8% decline for all of 2012.

$2,500 Gold Prices Ahead?

So how does peak gold factor into gold prices?

Gold turned in a less-than-stellar 6% return in 2012. Yet the gain was enough for the precious metal to log its 12th consecutive yearly gain.

For 2013, forecasts for the yellow metal look golden, partly because of the tried-and-true market equation of supply and demand – i.e., peak gold. Gold production has simply not kept pace with soaring prices and growing demand for the metal.

"I really do believe, unless the demand for gold drops, you are going to have to see $2, 500," Letwin maintains.

As Kenneth Hoffman, a Bloomberg Industries analyst in Skillman, NJ, clarified, "The reason that there is no supply response is that there is just not the metal out there to find. Finding good, high-quality gold mines that can put out a significant amount of product is almost impossible."

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